CONFIDENTIAL (FR)

CURRENT ECONOMIC CONDITIONS BY DISTRICT

Prepared for the Federal Open Market Committee

by the staff

February 3, 1971

TABLE OF CONTENTS

SUMMARY page 1

First District - Boston page 1

Second District - New York page 3

Third District - Philadelphia page 6

Fourth District - Cleveland page 9

Fifth District - Richmond page 12

Sixth District - Atlanta page 15

Seventh District - Chicago page 17

Eighth District - St. Louis page 20

Ninth District - Minneapolis page 22

Tenth District - Kansas City page 25

Eleventh District - Dallas page 28

Twelfth District - San Francisco page 31

SUMMARY*

[Asterisk:Prepared at the Federal Reserve Bank of San Francisco.]

Reports from the twelve Federal Reserve Districts indicate

that there has been no material change in economic conditions. Output

and employment appear to have leveled off after recent declines and,

despite some optimism that a recovery will begin later in the year,

the overall impression is that economic activity is at much the same

level as the previous month. Price rises are still expected to con-

tinue, though at a lower rate, and employment to increase relatively

slowly.

One reason for the lack of an immediate recovery is that

consumer spending has not picked up uniformly. In most districts,

consumers are still cost-conscious, responding to sales, but not willing

to make new major expenditures. At best, retail sales are described as

"more buoyant" (New York) and, at worst, "sluggish" (Dallas). But

more common are reports that "sales are slightly ahead of last year"

(St. Louis) or "reasonably good" (Kansas City).

Automobile sales in particular are not strong. In many Districts,

they are disappointing and below what was expected after the settlement

of the General Motors strike. Demand is concentrated in the lower-

priced compact and subcompact models, and there is no expectation

of a boom year for new car sales in 1971. Only in the Richmond and

St. Louis Districts are sharp increases reported and, in the former

case, the increase is a recovery from the strike-induced slump.

The lack of strong demand is reflected in automobile production.

General Motors has reduced overtime schedules and the other automobile

producers are operating at reduced levels.

Manufacturing shows no sign of a general recovery. There are

industries which report a rise in output (containers, furniture, steel,

some machine tools, and textiles), but other industries are still re-

trenching. Although major layoffs of workers are occurring less often,

companies are continuing to reduce their workforces through attrition

or unpaid holidays. Increased hiring is still not widespread. In-

vestment plans similarly are restrained and expenditures on capital

equipment in 1971 are expected to be at about the same level as last

year.

Even rising new orders for steel are not a reflection of an

upturn in the economy but rather represent hedging against either a

steel strike or further price rises. According to steel industry

economists, overall production for this year will not be above last

year.

There is one sector which has favorable prospects for recovery.

The demand for residential housing is picking up and sales of existing

houses are increasing. Nonresidential construction is not as strong

at the moment, and in many areas it is quite weak. But the net effect

is to increase demand for the output of the building-materials

industries and timber. In the San Francisco District, companies in

these industries are already beginning to expand production and make

heavier capital expenditures. An important factor in this expected

recovery is the fall in mortgage rates.

The lower mortgage rates are part of the general decline of

interest rates. Nevertheless, the slow-pace of overall economic

activity has meant that demand, particularly the demand for business

loans, has not responded to the lower rates. Banks are continuing to

lower the rates they pay for funds. CD rates have already fallen in

line with other market rates, and many banks are not looking for time

deposits. Rates have been cut on savings-type certificates in such

Districts as Philadelphia, Atlanta, and San Francisco; in the Chicago

District sales of these certificates have been restricted or eliminated.

There is pressure on passbook savings rates and some bankers advocate

the lowering of rate ceilings for savings accounts.

Wage increases are still common and retail prices are con-

tinuing to creep up. But there are reports of price cuts (nonferrous

metals, for example), and price shading (plastics, some oil products,

and transformers), while other prices are higher (building materials

and farm products).

Forecasts for the coming year of business and academic economists

reported by Cleveland and Boston are for a GNP below that forecast

by the Council of Economic Advisers. The CEA has forecast a GNP of

$1,065 billion for 1971; the other forecasts reported were $1,045

billion by Cleveland and $1,047 billion by Boston. The economists'

view on unemployment were also more pessimistic than those of CEA. The

general view of bankers and businessmen is that rising prices will con-

tinue to be a problem for the rest of the year without much easing of

wage pressures or any major increase in employment.

FIRST DISTRICT - BOSTON

First District business conditions show no material change

from last month, with the hoped-for stimulus from auto sales and other

retail areas failing to materialize. The commercial banking sector

continues to log excellent deposit flows, as do thrift institutions in

most areas. Residential mortgage rates have fallen further, in some cases

by large amounts. Our academic respondents seem a bit less pessimistic

than in December.

Reports of strong consumer response to January sales con-

stitute the one bright spot on the retail scene. This is entirely

consistent with the pronounced consumer cost consciousness which has

been reported since last fall. Auto dealers have felt the same phenomenon,

with very high proportions of their sales activity concentrated in the

compact and subcompact classes. Intermediate and luxury class auto

sales have run well below expectations following the conclusion of the

GM strike, and dealers seem split as to whether they are up against a

generally poor year or merely feeling unusual seasonal effects.

To date, improving mortgage conditions seem to have provided

impetus mainly to sales of existing homes. Further mortgage rate cuts

seem likely, however, and mortgage lenders generally expect a strong

surge in new home activity with the spring. Declining mortgage yields

have already led several area thrift institutions to drop their 6

percent savings certificates, and more are expected to follow.

While noting his general satisfaction with the proposed

Federal budget for fiscal year 1972, Professor Wallich expressed concern

over the Administration's $1,065 billion GNP estimated for 1971. He

suggested that it cannot be taken seriously and that, lest it be

allowed to influence current policy, its origins within the CEA should

be explored.

Professor Eckstein now reports an upward revision in the DRI

forecast for 1971 to $1,047 billion. The adjustment was made largely on

the basis of recent improvements in housing starts and retail sales,

as well as continuing monetary ease and declining interest rate levels.

The unemployment path commensurate with the $1,047 billion projection

shows 5.9 percent for year-end 1971 and 5.4 percent at the close of 1972.

Eckstein made a strong plea for continuing the current monetary stance,

resisting any tendency to reduce the stimulus in response to recent signs

of recovery and continuing signs of rapid inflation.

Professor Tobin expressed the view that the burden of achieving

economic expansion over the next 18 months should properly fall on

monetary, not fiscal policy. Accordingly, he feels that the System has

for some time been overly cautious in its targets for credit market con-

ditions and the aggregates. Tobin, Wallich and Eckstein all are expecting

a reversal in the declining rate levels by mid-year as business credit

demands turn round. Professor Samuelson was unavailable for comment

this month.

SECOND DISTRICT - NEW YORK

Opinions expressed by the directors of the New York Bank and

of the Buffalo Branch and other business leaders point to a significantly

more buoyant retail sales picture and, on balance, a continued favorable

outlook for residential construction. At the same time, most respondents

looked for little or no immediate improvement in the unemployment

situation nor for any easing of wage and price pressures.

Sentiments expressed by most respondents regarding consumer

spending were noticeably more optimisitic than a month ago. The consensus

was that the spurt in sales in the pre-Christmas week, and the continued

favorable retail sales picture in January, might well signal the long-

awaited improvement in consumers'attitudes. A typical opinion was ex-

pressed by the chairman of the board of a large New York City bank, with

close contacts with several large retail firms, who saw a decidedly

optimistic turn in outlook just before Christmas and into January.

However, several directors of the Buffalo Branch were less optimistic

regarding automobile sales, reporting that most auto dealers in their

area were experiencing less business than had been anticipated with the

settlement of the General Motors strike. One of the Buffalo directors

felt that the high rate of savings in the recent past, together with

declining consumer debt could well set the stage for a sharp rise in

auto sales within the next few months.

Most respondents were generally optimistic about the outlook

for residential housing construction. Several of the directors referred

to the increased availability of mortgage funds available at lower rates

at banks, insurance companies and other financial institutions. Several

of the directors at both the New York Bank and the Buffalo Branch,

however, noted that the high cost of land and other construction costs

could inhibit increased residential construction.

While mixed, opinions regarding the unemployment picture on

balance were relatively pessimistic. The chairman of the board of a

large manufacturing concern felt unemployment would rise further, while

similar feelings were expressed by an upstate banker and the president of

another large manufacturing concern. The Rochester businessman reported

that unemployment in that city was rising, and that the largest firm in

the area was making its employees take one day off without pay a month

and was considering ordering additional time off. An upstate banker, on

the other hand, expected some improvement in the spring. Another

director reported a trend toward less severe layoffs in airlines,

electronics, computer-related industries, and light manufacturing, with

many job cutbacks accomplished through attrition rather than actual

layoffs.

The directors of the Buffalo Branch generally felt that

unemployment had peaked, but they did not look for any dramatic improve-

ment over the next few months.

The directors and other business leaders continued to show

concern over the wage and price situation. None of the respondents saw

evidence of an easing of wage pressures. The chairman of the board of

a large New York state utility corporation expressed the feeling that

until union leaders can be convinced inflation will actually slow, it

will be difficult to get them to reduce their demands. The real purchasing

power of workers has barely held even over the last 2 1/2 years, he

noted, placing sustained pressure on union leaders to seek higher wage

settlements. Most of the respondents saw no signs of price shading.

The chairman of the board of the large manufacturing concern did report

that while he knew of no appreciable price reductions in the industries

with which he was familiar, he heard talk about such cuts elsewhere.

Another leading businessman, a director, thought that the only area

where price pressures might ease was raw materials.

THIRD DISTRICT - PHILADELPHIA

Business activity is accelerating in the Third District.

Although expectations about future expansion in the economy are in a

state of fragile optimism, retailers report that January was a good

month, and they are hopeful about February. Manufacturers report im-

proved business in January as well, and they too are cautiously optimistic

about the coming months. Industrialists believe that more liberal de-

preciation allowances will give plant and equipment spending a boost.

But, for the near term at least, business will hold the line on hiring.

Loan demand at banks continues weak; also bankers remain concerned about

the quality of loans in their portfolios.

Philadelphia department stores report that the good Christmas

performance continued through January. Sales remain above last year

even after adjusting for price increases. Demand is mixed across

merchandising lines, however, "where customers see good values, they're

buying," as one retailer put it. Sales clearance items such as women's

coats, pant suits, and men's shirts, suits, and accessories are moving

well; whereas furniture and other big ticket items remain weak. The

test of consumer strength will come in February, one large retailer

says. His reasoning is that post-holiday sales will be over and the

new spring merchandise will be on display. If the newly stocked goods

sell well, there is room for optimism. In the meantime, area retailers

are keeping a sharp eye on inventories and holding new orders to a

minimum.

Manufacturing activity in the Third District is still distorted

by the aftermath of the General Motors strike. New orders and sales

were up substantially in January. Looking beyond the strike make-up

period, however, area manufacturers are cautiously optimistic that

a mild upward turn in the economy is in prospect.

All of the directors with industrial connections agree that

the recent changes in depreciation allowances will stimulate business

investment, particularly for new equipment. One director with wide

contacts in the industrial world says there is confusion about when

the new depreciation rule will go into effect. The upcoming Treasury

hearing of the new changes is causing some uncertainty, he says. But

once the confusion is gone and the rule change becomes firm, he be-

lieves that investment outlays will be stimulated beginning about six

months later.

Although the area business community is mildly optimistic

about an economic pickup, they plan to hold the line on the number of

employees at least for the near term. By mid-year, however, about

one-third of the manufacturers we contacted indicated that some hiring

may be taking place.

Several directors used the word "sober" to describe the

general mood of people in their respective area. Rising unemployment

and prices are making consumers cautious, say these directors. One

director says that unless this sober psychology is altered, he does

not believe that the pickup in the economy will be substantial.

At banks, loan demand remains flat. Also there continues to

be a big concern about the quality of loans- Bankers report that they

are going out of the savings certificate business. One country banker,

for example, says that his bank no longer issues 5 1/2 or 5 3/4 percent

certificates. He says he has not faced the renewal problem yet because

these certificates have not started maturing. He is not sure yet how

he will handle renewals when they arise.

FOURTH DISTRICT - CLEVELAND

This report is based on information obtained from about 40

economists who attended a regular meeting of the Fourth District

business economists' round table held at the Federal Reserve Bank of

Cleveland on January 29, 1971. In general, these economists have a

considerably less optimistic outlook for the economy in 1971 than that

contained in the recently released forecast of the Council of Economic

Advisers.

The median forecast of the group was for a GNP of $1,045

billion in 1971, with a year-to-year gain of 4.2 percent in the price

deflator and only 2.7 percent in real GNP. Views on the unemployment

situation were generally pessimistic. With real GNP projected to rise

4.4 percent from the fourth quarter of 1970 to the fourth quarter of

1971, and with above-average gains expected in the labor force and

productivity, most of the economists felt there would be little or no

reduction in the unemployment rate by year end.

On the other hand, some members of the group expressed the

view that the decline in consumer confidence has bottomed out, and

that there was a favorable change in the climate for consumer spending

toward the end of the fourth quarter of last year. New car sales are

not expected to reach boom proportions in 1971, however, particularly

after allowance for the recoupment of strike-induced losses during

1970. The median forecast of new car sales in 1971 (submitted by ten

economists associated with the automotive, steel, and rubber industries)

calls for domestic sales of 8.6 million units and imports of 1.2 million

units. Auto production is expected to level off in February at roughly

an 8.5 million annual rate and to continue at that rate through the

second quarter. It was noted that part of the rebound in auto sales

during the current quarter would be reflected in the producers' durable

goods component of GNP as a result of the postponement of fleet car

purchases and the shortage of GM trucks in the fourth quarter.

The three steel industry economists attending the meeting

were not enthusiastic about the outlook for their industry. New orders

for steel are up sharply (one major company said its orders were running

50 percent above the level of two or three months ago), but production

for 1971 as a whole is expected to be virtually unchanged from last

year. Price-hedging, in addition to strike-hedging, is now considered

to be an important factor accentuating steel shipments during the first

seven months of this year. Among the unfavorable developments reported

was the expectation that the net trade deficit in steel is projected

to widen from 6.6 million tons in 1970 to 13.3 million tons in 1971.

The consensus of the steel industry economists was that if there is a

steel strike, inventories held by steel consumers would last about two

months. It would take a strike of at least three months before other

industries would be seriously affected. If there is no strike, the

liquidation of excess steel inventories would probably extend into the

first quarter of next year.

With respect to capital goods, the business economists generally

expect current dollar expenditures to remain flat during the first half

of 1971 and to begin a modest recovery in the second half. One

favorable straw in the wind was noted by an economist from a major

machine tool company in Cleveland. He seemed to draw some encourage-

ment from the fact that in January his company's new orders for metal

cutting tools were about 25 percent above the extremely depressed rate

of the fourth quarter.

Economists from several large commercial banks who attended

the meeting mentioned that despite the recent sharp decline in short-

term interest rates and the reductions in the prime rate, many banks

had not relaxed compensating balance requirements in an attempt to

increase business loan activity. According to these economists, big

banks do not get "political mileage" out of reductions in compensating

balance requirements.

FIFTH DISTRICT - RICHMOND

Surveys of businessmen and bankers in the Fifth District

indicate general agreement on the following points: (1) Continuing

weakness in the manufacturing sector in shipments, volume of new orders,

and backlogs of orders; (2) Considerable post-holiday strength in

retail sales including automobiles: (3) A weak but slightly improved

employment situation; (4) Continuing evidence of price cuts in manu-

facturing, but not in retail trade and services; (5) A gradual slight

improvement in residential construction; (6) Continued very weak loan

demand at District banks; (7) An optimistic but somewhat guarded out-

look for future business conditions.

District manufacturers report on balance that shipments, new

orders, and backlogs of orders continued weak during the first month

of the new year. Reports of weakness in such industries as chemicals,

synthetic fibers, electrical equipment and nonferrous metals continue,

while some improvement is noted in containers, furniture, and hosiery.

District bankers and businessmen in trade and services report

that retail sales are continuing on the high side in their respective

areas, following a good holiday season for retailers. Further improve-

ment in automobile sales is also reported, particularly in relation

to the severe slump of the last three months that was associated with

the automobile strike.

Manufacturers' inventories are reported to have increased again

in January while retailers report no recent change. Retailers' inven-

tories were brought down considerably in December.

Respondents in manufacturing and District bankers continue

to report on balance that employment is down, but reports of further

decline are less numerous than during the final quarter of last year.

Businessmen in trade and services report no change in employment in

January.

District bankers report that available labor supplies in

their respective areas remain high, and in the manufacturing sector,

the length of the workweek continues down. Some prolonged strikes in

the District account in part for the continuing weakness in the employ-

ment situation. Evidence of further deterioration which was present

last fall, however, has decidedly waned.

The improvement in prices noted in the last two surveys by

District manufacturers is apparently continuing. Some producers in

nonferrous metals and hoisery report price cuts, and for the third

consecutive month, reports of price increases are outnumbered by re-

ports of declines. Businessmen in retail trade and services, however,

report that prices are continuing to climb. Respondents across the

board report that upward pressure on wages remains strong.

Some improvement in residential construction during January

was reported by District bankers. Recovery in the residential building

field, however, is not yet vigorous. Comments received from respon-

dents indicate that considerable further increases can be expected in

the months ahead, but thus far some evidence of weakness remains.

Nonresidential building, which had been on the increase in the District

since last August, was reported to be lower in January.

Business loan demand, which was reported down substantially

in December, remains very weak according to District bankers. Mortgage

loan demand is reported unchanged, following a sharp drop in December,

and consumer loan demand is reported down after a December increase.

According to banking respondents, loan demand in general is weaker than

at any time during the second half of 1970.

Although sentiments are mixed, the general outlook of survey

respondents remains favorable. The proportion of respondents expecting

further improvement in economic conditions continues to be a maiority.

Although the outlook is favorable, a notable lack of enthusiam concerning

future conditions is evident in the reports of respondents. Manufacturers

in the District continue to be plagued with inventory problems and they

show little inclination toward a resumption of spending for new plant

and equipment. While District retailers were apparently satisfied with

the sales of the recent holiday season, they also remain cautious but

basically optimistic in their outlook.

SIXTH DISTRICT - ATLANTA

We recently surveyed a group of leading businessmen and

bankers throughout the Sixth District about price shading and other

topics. Six months ago, the identical group was questioned on similar

topics. By comparison, attitudes toward economic prospects are

slightly improved over six months earlier. Increases in manufacturing

operations are now slightly more numerous, and there are fewer in-

stances of cuts in capital expenditures. Rates on small CD's and

savings accounts either have been lowered or probably will be shortly.

On the other hand, price rises by suppliers continue to be numerous,

price shading has not significantly increased, and business entrench-

ment remains widespread. Most of those questioned report that

investment—residential construction excepted—will not be affected in

the near future, if long-term rates come down further.

In our most recent questionnaire, several businessmen cited

instances of price shading, but there was little increase in this

practice. Specifically, selling below list prices was reported in

transformers, copper cable, aluminum fabricated products, and plastics.

A respondent in the metal fabricating business indicated that many

producers and most distributors were selling below list prices. An

oil business executive claimed that discounts of 8 to 10 percent were

common.

As was the case with the earlier questionnaire, nearly all

respondents cited price increases by suppliers. However, a feed producer

said suppliers did not raise prices this January as they had a year ago.

A steady and substantial increase in building material prices was noted.

According to those questioned, business entrenchment is still

common. Failure to replace production workers and salaried employees

leaving through attrition is evidently widespread.

Increases in manufacturing operations were reported in: paper

products, meat packing, textiles (double knits, sport denim, corduroys,

yarns), and apparel (low-priced suits). As a result of recent oil

leases, there has been an increase in the demand for boats used by the

offshore drilling industry. A businessman in the materials handling

line reported a flood of inquiries in the past 30 days, which would

indicate a substantial increase in the level of operations in that

business shortly.

In the questionnaire six months ago, attitudes toward economic

prospects varied widely, with about an equal division between those

expecting an upturn in the near future and those seeing recovery delayed

until the winter and next spring. In the latest questionnaire, most

respondents were somewhat more optimistic in their outlook.

The majority of the bankers answering the questionnaire in-

dicated that rates on small CD's and savings accounts had either been

reduced recently or would be in the near future.

Information received from other sources shows the following

consensus about wage and price guidelines among 16 leading businessmen

in the Tampa area: Guidelines are impractical; Wage increases are the

main source of inflation; Neither The White House nor Congress can or

will clamp down on labor unions; And a reduction in government spending

would have a favorable effect on reducing the inflationary spiral.

SEVENTH DISTRICT - CHICAGO

Most businessmen, lenders, and economic analysts in the

Seventh District expect a gradual rise in general activity throughout

1971. But it is impossible to disentangle individual views from the

conclusion of "experts" now publicized, more widely than ever before,

in newspapers, periodicals, and on television. Many decision makers

respond favorably to the general idea of an "incomes policy," but

their statements usually are so vague as to be classified as gibberish.

Prices and terms of trade in the wholesale markets reflect

increasingly competitive conditions. If these trends are also present

at the retail level, it is through special sales and promotions, not

readily subject to measurement. Announcements of price increases are

less frequent than a year ago and announcements of decreases are more

frequent. Delivery times are shorter, order backlogs are lower.

Continued large increases in worker compensation, however, convince

many manufacturers that further price increases for their products

are essential. Reductions, or slower than expected growth, in volume

relative to capacity also are offered as arguments for higher prices.

This is particularly evident in public transportation and regulated

public utilities.

Overall employment in this area appears to have stabilized.

Unemployment probably is continuing to rise, but at a slower rate.

Help-wanted ads are about 50 percent below the year earlier level in

the Chicago area. Response to such ads is extremely heavy compared

with any period of the past several years. Unemployment among people

of long experience, and those with professional and executive experience,

is probably the most widespread since the 1930's. This situation is

related to cost-cutting efforts aimed at reversing declines in profit

margins. Employees of divisions of conglomerates are especially

vulnerable.

Scattered evidence suggests that the improvement in most types

of retail sales, which developed shortly before Christmas, continued

in January. Buyers are still cautious, however, on purchases of

luxuries and big ticket items.

General Motors has reduced overtime schedules because its

inventories of finished cars are being rebuilt rapidly. Other motor

vehicle producers have been operating at reduced levels in recent weeks.

The steel industry provides the most optimistic reports,

currently, from any District industry. Orders for steel are said to

have picked up "rapidly" in recent weeks. This development is believed

to be more than a mere reflection of the prospect of a strike next

August 1.

Some manufacturing firms will increase, or maintain, capital

expenditures in 1971. In total, the physical volume of fixed invest-

ment by business firms, with the exception of utilities, doubtless will

be lower. New commercial building projects are much less frequent than

a year ago.

Prices of meat are expected to remain firm, following declines

in 1970. Prices of farmland in the District turned up in the fourth

quarter after two years of decline. Greater availability of credit may

have produced this result in the face of declining net farm income.

Rural banks are now more interested in real estate loans. These banks

always are slow in following general trends. Recently, they have cut

rates on feeder cattle loans.

All savings associations we know of have reduced rates on

mortgage loans once or more in the past month or two, with total re-

ductions averaging about one half of one percentage point. Further rate

reductions are expected. Relatively few of these institutions have

lowered down payments, reduced fees, lengthened maturities, or eased

credit standards.

Business loan demand at commercial banks continues very slow,

but some institutions think the trend has firmed recently. Not only

have rates been cut substantially on large CDs, but there is no

interest in obtaining funds through this route. Some banks have

eliminated or restricted sales of consumer CDs. Some smaller banks

would like to see the board reduce the ceiling rate on passbook savings.

EIGHTH DISTRICT - ST. LOUIS

The slight increase in optimism reported last month by

businessmen in the Eighth Federal Reserve District continues to pre-

vail. Retail sales, which picked up seasonally just prior to Christmas,

are still slightly ahead of this time last year. The labor picture

remains unchanged in the absence of strikes. Firms interviewed report

that belt-tightening plans have been completed. Some capital spending

plans are slightly higher than last year, but these tend to be the

exception. Homebuilding continues to exceed year-earlier levels, and

prospects for this activity in the future are good.

Most respondents engaged in retail sales indicate that their

business is better than during the autumn months. Some automobile

dealers report sharp increases in new car sales. Although overall sales

improvement has not led to major changes in inventories or plant size,

retailers generally feel that a moderate upswing is underway. Prices

are expected to continue up, however, reflecting high wage settlements

and rigidities in the labor market.

No major improvement in the unemployment picture is anticipated

in the near future. Respondents reported no employment expansion plans,

but some indicate that the workweek may be lengthened.

Although one large firm reports a capital budget that is higher

this year than last, the increase is due to long-term commitments rather

than to any additional optimism based on recent sales or other factors.

Most firms are still wary of plant expansion, and in the St. Louis

area the number of new plant inquiries is still down from the corresponding

period in the previous year.

The picture remains bright with respect to homebuilding.

Building permits issued in suburban St. Louis are currently running

more than double those of a year ago. Traffic of homeseekers has

improved as more people are actively shopping for houses. The major

drawback in the industry is the increased cost of housing due to rising

input prices, especially labor costs. The directors of one branch of

this Bank noted that labor costs constitute 50 percent of total housing

costs. Whereas the corresponding proportion in automobile manufacturing

is only 25 percent. This factor is pricing some people out of the

market despite the lower mortgage rates now available. One respondent

felt that this may be a hindrance in meeting the President's announced

goal of 2.6 million new housing units in 1971.

District banks had an above average increase in profits in

1970. Loan demand, however, is not increasing, while deposits are

rising slowly, and rates paid on passbook and other savings-type de-

posits are generally unchanged. Thus the outlook for banking in 1971

is for a substantial decline of the margin between the cost of funds

and the rates on bank assets. Some banks report that although net income

may be maintained at current levels, any expansion in net income will

definitely be less than the average rate of recent years.

The agricultural situation is characterized as "dreary."

Losses and late harvesting of field crops are reported to be cutting

returns in this sector. Prices of some crops are said to be satisfactory,

but the volume of sales is disappointing. Despite the dissatisfaction,

however, farm cash receipts remain above corresponding levels of a year

ago in most Eighth District states.

NINTH DISTRICT - MINNEAPOLIS

Business loan rates at Ninth District commercial banks have

tended to slip more noticeably than consumer loan rates in recent weeks.

At the same time, rates offered on consumer savings deposits have held

steady while rates for large CDs have dropped precipitously; some banks

have even stopped trying to attract large CDs. Liberalized depreciation

rules, which were announced by the Treasury, are expected to have only

a minimal impact on District manufacturing firms. There is no consensus

among District community leaders regarding the current stance of mone-

tary policy. Some people feel the Fed has moved too far too quickly

on the side of ease while others prefer to see even lower interest rates.

To our knowledge, most major banks in the District have now

reduced their prime rates to 6 percent, but other loan rates have not

fallen accordingly. Loan rates to less-than-prime business customers

have edged down in the wake of prime rate cuts, but reductions have

been less than proportional. One reason given for this was that these

rates did not rise as fast as the prime rate and, as a result, would

probably not fall as fast. In addition, one director felt that even

though there was money available, banks were still trying to maintain

their rates and reducing them only to their low risk, old customers.

One South Dakota director felt, however, that production credit

associations are giving banks stiff competition, and that banks will

have to reduce their rates sooner than they would like. In general,

mortgage interest rates are slipping in the District, although rate

levels still seem to be slightly higher than those in some sections of

the country. The one exception to this is in South Dakota where one

S&L quoted a rate of 7 percent on "real prime property." Consumer loan

rates have slipped a little, but in the words of one bank director,

"usury ceilings stopped them from going up, so consumer loan rates will be

slower in coming down." Another director said that consumer loan rates

in his area have not fallen because rates being offered for savings

have not softened.

Commercial banks in the District are competing less vigorously

for large CDs, and there are a few instances where banks are not even

accepting large CDs. Rates on consumer savings deposits, however, have

not shaded, although the banks and S&Ls would probably like to see them

soften. One bank director from outside the Twin Cities said that

savings rates in his area have not fallen, but that banks are constantly

watching developments in Chicago and Minneapolis. An S&L officer also

stated that his S&L would like to offer lower rates but is afraid that

savers would move their funds to those institutions which would pay

higher rates. To him, the only logical solution to the dilemma is

for the FHLBB and FRB to lower ceiling rates on savings deposits.

The liberalized depreciation rules announced by the Treasury

are not expected to significantly change District manufacturers'

capital spending plans this year for at least three reasons. First,

District manufacturers are not large enough to notice any significant

changes in their cash flows as a result of the new rules. Second,

the lag between planning and expenditures is such that manufacturers

cannot immediately take advantage of the new rules. Third, manu-

facturers are already concerned about excess capacity. One director,

however, thought that highway contractors are taking advantage of the

new ruling, because in the long run liberalized depreciation rules turn

out to be the difference between buying new equipment more cheaply and

purchasing used machinery. Another director was aware of one case

where the new rules will have a significant change on cash flows, but he

thought it would not have a large effect on the company's spending plans.

The directors of the Bank were queried regarding their and

other people's opinions concerning the current stance of monetary policy.

Public opinion appears to be quite divergent. In general, those people

who are even aware of monetary policy think that the Federal Reserve is

acting "about right." The directors also are in general agreement with

recent monetary policy actions although three directors voiced some

doubts. Two directors wondered whether the Fed was moving too aggressively,

and one of these questioned if this would not rekindle inflationary

pressures later this year, especially in view of the major labor negoti-

ations coming up. Another felt that monetary policy is too confusing

and that the Fed should stay with one set of rules or another. Business-

men are confused and when this happens they become conservative in their

actions.

TENTH DISTRICT - KANSAS CITY

There are indications that the economy of the Tenth District

may be showing renewed strength. A growing optimism is present in some

parts of the District, beyond what may be inferred from current business

statistics. Reports from Head Office and Branch Directors support the

evidence from the statistical indicators that construction activity

and outlook is a relatively bright spot in the economy of the Tenth

District. Both residential and nonresidential building are responding

favorably to factors such as increasing availability of funds, improving

economic conditions, and the resumption of activity following the end

of the construction workers' strike in Kansas City.

The slowdown in the growth of personal income seems to have been

reversed in the District as a whole, and the District unemployment rate

has apparently stabilized. Of course, there are variations within the

District and among different industries. For example, further layoffs

have been announced for several defense-oriented establishments. In

contrast, business conditions generally seem stronger in Colorado,

New Mexico, and Oklahoma than in the remaining District states.

Abnormally severe winter weather also has reduced the pace of economic

activity in the northern section of the District. On the whole, retail

activity during the Chris tmas season was reported to have been reason-

ably good—in many cases, better than earlier expected.

Strength in the value of construction contract awards is found

in both the residential and nonresidential parts of the industry. Again,

the northern section of the District appears to be somewhat laggard

as far as construction is concerned. Some Branch Directors from Wyoming

and Nebraska report that Section 235 and 236 housing is about the only-

kind of residential building going on in their areas. In the Omaha area,

there is very little in the way of new commercial and industrial projects,

only spotty interest in apartment building, and not much custom building

of new single-family dwellings.

Elsewhere, construction activity is relatively strong—especially

in Oklahoma, New Mexico, and Colorado. An upsurge in home building

is reported for both Tulsa and Oklahoma City, and both also are experiencing

a good deal of commercial construction activity. Albuquerque, too, is

having an increase in both multiple-unit and single-family building, and

considerable optimism is reported in business circles there—with regard

to the general business outlook as well as in housing. Commercial and

residential building (both single-family and multiple-unit structures)

growth is vigorous in Colorado, both in Denver and in other urban centers

as well. There (as elsewhere in these states), strength in housing is

reported across the spectrum from smaller, less expensive single-family

homes (some due to Section 235 and 236 subsidies) through higher-priced

single-family dwellings to high-rise, high-price apartment buildings.

The general retrenchment of livestock prices during the last half

of 1970—due primarily to the new sharp increase in hog marketings—had

a pronounced impact on District farm income. Last year, cash receipts

from District farm marketings—73 percent from livestock sales—increased

2.4 percent above 1969 levels, as compared with a 3 percent rise for

the nation. However, third and fourth quarter receipts in the District

were, respectively, 2.6 and 4.1 percent lower than in the comparable

periods for 1969, with both crops and livestock contributing to the

decline.

There are indications that the District livestock picture may

show improvement in 1971. Recent reports point to a likely abatement

of the increase in sow farrowings, compared with the levels of a year

ago. Likewise, the number of cattle on feed in the District, as of

January 1, was 3.9 million head—down 1 percent from 1970. For the

nation, the decline was 3 percent. Marketings in the District during the

October-December quarter were 11 percent higher than in the year-earlier

period, while placements were down 4 percent. Hence, the production

adjustments currently underway in the hog industry, together with a likely

reduction in fed cattle marketings, point to higher livestock prices in

the months ahead.

After declining farm prices from March to December 1970

helped to introduce some stability into the overall wholesale price

index, the January 1971 increase in the WPI was spurred mostly by rises

in the farm products and processed feeds components of the index. In

view of the prospects for higher livestock prices, it is unlikely that

declining farm prices will exert a stabilizing influence on the overall

WPI in 1971.

ELEVENTH DISTRICT - DALLAS

Continued inflation appears to be the major concern of the

directors of this bank. Of the ten head office and branch directors

surveyed (none of whom is a commercial banker), most expect a growing

economy in 1971, characterized by a resurgence in consumer spending,

a further downward movement of interest rates, and continued wage and

price increases. With respect to the economy of each respondent

director's local area, prospects were viewed as being only fair. Some

major public construction projects are planned for 1971, and it is

expected that these capital outlays will require tax increases in some

localities. Retail sales are anticipated to remain sluggish, and few

of the respondents are planning any increase in capital expenditures.

Job opportunities are expected to rise only slightly as the year progresses.

All foresee higher labor costs, but few expect to make changes in present

levels of employment.

With respect to the national economy, a fairly optimistic out-

look apparently holds. Most directors expect renewed economic growth,

largely as a result of a rise in consumer spending and an increase in the

Federal budget deficit. All but one of the respondents feel that in-

terest rates will move down further through 1971. In addition, the gap

between short-term and long-term rates is anticipated to narrow somewhat

as long-term rates decline relative to short-term rates. However, most

expect that inflation will continue to be a problem during the remainder

of the year—in fact, much more so than unemployment. And, while some

feel it would be wise to institute wage and price controls, none believes

that this action will be taken.

The economic outlook for most local areas is somewhat less

optimistic, the directors report. A few do expect growth in their cities'

budgets, as some major public construction projects are planned. How-

ever, it was mentioned that increased taxes—particularly property

taxes—are likely to accompany these additional governmental expenditures.

Local consumer spending is not expected to provide much strength this

year, with retail sales anticipated to be about the same as in 1970.

Moreover, job opportunities may improve only slightly. All are expecting

rising labor costs in 1971, with some anticipating an increase of more

than 10 percent. And while few think they will have to release additional

employees, none mentioned a need to add to employment in 1971.

Respondents indicated that capital expenditures are also likely

to remain about unchanged from last year. In fact, only a few reported

increases in capital expenditures last year even though dollar sales

volume rose fairly substantially. Most of the increase in dollar sales

was the result of inflation, as physical-unit sales either rose only

slightly or declined. Moreover, few anticipated any major change in

product composition. Thus, in most cases, present plant capacity is

quite adequate. However, some indicated that they may face future changes

in capital equipment in relation to new anti-pollution regulations.

On the whole, the district economy continues to remain fairly

strong in comparison with the rest of the nation. Retail sales were up

slightly in December, but consumer spending still remains subdued.

Industrial production continues strong, reflecting mainly the high level

of oil activity in the District. Although oil allowables for February

are down slightly, the longer-run outlook for production is bright as

transportation problems caused by the shortage of world oil tankers

continue to place demand on domestic sources. Unemployment in Texas

rose substantially in December, but it is still significantly below

the national average. In the agricultural sector of the District

economy, there is some concern about the recent dry weather, which has

forced supplemental feeding of livestock in some areas.

TWELFTH DISTRICT - SAN FRANCISCO

Businessmen and bankers in the Twelfth District expect little

change in economic activity until later in 1971. Despite the easing

of financial conditions through lower interest rates and the greater

willingness of banks to lend, the demand for loans has not changed

significantly. Business investment plans are cautious, and consumers,

instead of increasing their spending, are increasing their saving. It

is expected that activity in the housing market will increase in 1971,

stimulated in part by the greater availability and lower price of

mortgages.

Retail sales are not showing any signs of marked increase;

in most areas they are proceeding at a moderate to slow pace. There

had been a jump in sales during the ten days before Christmas, but this

increase has not been sustained, and post-Christmas sales are described

as disappointing. As a result, inventories are higher than desired and

staffs are being reduced by some stores.

Automobile dealers in particular are finding that their sales

are disappointing since 1971 models are not selling as well as expected.

One factor, it seems, is that customers are reluctant to increase their

indebtedness. Dealers have heavy inventories and some are complaining

about manufacturers' pressures to build up stocks still more. A favorable

factor is that lower interest rates have reduced the costs to dealers of

carrying their inventories.

Business expectations are in line with consumer behavior. In

general, businessmen are maintaining their current activities in

line with their expectation of no immediate recovery in the economy.

Business investment plans indicate that expenditures will be somewhat

smaller than in recent years. A survey of anticipated expenditures for

plant and equipment among Arizona companies found a definite shift toward

caution. For 1971, only 37 percent of the firms reported they would have

higher expenditures, while 35 percent reported lower spending plant. In

contrast, the figures for the 1969 and 1970 surveys averaged 60 percent

for increased outlays and 16 percent for lower expenditures. The Seattle-

Tacoma area continues to report poor business prospects and one bank there

describes local business loan demand as being at it lowest level in 24

months< A Southern California steel mill recently has made a sharp cut

in its work force. In Arizona, a state which is otherwise prosperous,

manufacturing employment is at its lowest level since June 1968.

The liberalized depreciation allowances, recently announced,

are not expected to have any immediate impact on business spending.

Most businessmen report that the change is too small to affect their

decisions or that their investment plans "are based on longer-run fore-

casts of the demand for their products.

There are some favorable trends in manufacturing. A large oil

company reports that it is maintaining its planned investment in 1971

at the same $800-million record set in 1970. A major electronics firm

in Oregon, which had previously announced a layoff of 1,000 employees,

has reversed itself and, instead of a layoff, will only require each

employee to take a 10-day, unpaid vacation before May 1. In the face

of an expected increase in housing demand, building materials firms

are expanding production and beginning to undertake new investment in

plant. Timber mills are starting to increase output and rebuild

inventories of certain product lines. Some mills which had been closed

are being reopened.

Changes in housing demand are in line with these expectations.

In Southern California, sales of houses are rising according to reports

of local real estate firms. In Idaho and Utah, construction activity

continues to expand. Overall, most of the strength has been in resi-

dential rather than nonresidential building.

Agriculture in the District has mixed trends. Fruit prices

have held up well. Other crops have had large yields, but their prices

are likely to fall as a result. There are also large stocks of poultry

and beef on hand which make any substantial increase in livestock prices

less likely.

Banks are intensifying their efforts to obtain good business

loans, but no major increase is reported. Consumers seem to be willing

to increase their instalment debt and the counterpart of this is an

increase in savings deposits. Banks have cut their interest rates on

various classes of loans in line with market trends. Several major

banks have stopped accepting 5 3/4 and 5 1/2 percent consumer-type

savings certificates. The maximum is now 5 percent and reductions are

becoming general. There are complaints of a profit squeeze by some

bankers and they hope that Regulation Q ceilings will be lowered to

facilitate the movement to lower rates on all savings accounts.